The Global Context

Global coffee markers have been subject to many interventions and relatively effective regulation during much of the 20th century. This can offer lessons for Fair Trade as it endeavors to achieve similar goals in stabilizing and increasing prices to farmers. From the early 20th century until 1989, government interventions attempted to do the same, primarily by limiting exports and controlling stocks. As the largest coffee producing-country, Brazil was especially influential in this respect, and in the early part of the 20th century, it attempted to control prices through unilateral actions, including some drastic efforts such as destroying millions of bags of coffee in the 1930s (Raffaelli, 1995: 35). International interventions also took place, aimed at stabilizing commodity prices. In 1940, the Inter-American Coffee Agreement was signed between the U.S. and Latin American coffee-producing countries. The agreement aimed at limiting production by distribution of export quotas to North America (Raffaelli, 1995: 34–37; Daviron and Ponte, 2005:84–86).

After World War II, a series of negotiations took place in United Nations forums, with the objective of creating commodity agreements that would prevent extreme highs and lows in commodity markets. Since every commodity was different, they needed to be dealt with case by case. Commodity agreements made for the following products were especially important for developing countries: coffee (1962–1989), cocoa (1972–1988), rubber (1980–?), sugar (1954–1983), and tin (1954–1982) (Raffaelli, 1995; Gilbert, 1996). Only some of the agreements included export controls or price ranges. The International Coffee Agreement introduced an implicit target price range for coffee at 115–150 U.S. cents per pound from 1981. Export quotas were allocated to producer countries, which in turn distributed export permits to coffee producers. Quotas were not constantly enforced, but were introduced when coffee price was low (Gilbert, 1996). Some international commodity agreements continue to exist, including the International Coffee Agreement, but they are no longer market interventions, but can be characterized as development programs.

In the 1970s, the example of OPEC (Organization of Petroleum Exporting Countries) showed developing countries that limiting commodity production can raise prices. Commodity-producing developing countries saw international commodity agreements as possibilities to provide financing for development and as a cornerstone of the New International Economic Order (Gilbert, 1996). There are, however, differences between OPEC and commodity agreements. OPEC is a cartel, where producing countries unilaterally restrict supply, whereas commodity agreements included both producing and consuming countries in their negotiations.

Petroleum, unlike tropical agricultural products, is difficult to replace in short to

medium term. One could argue that coffee comes close to being a necessity in Northern societies. However, coffee production could be substantially expanded in a country not participating in a cartel.

The International Coffee Agreements succeeded in raising and possibly stabilizing prices, which still remained volatile. Its success relative to other commodity agreements resulted especially from the participation of all major producing and consuming countries. Even the most reluctant country to control commodity prices, the United States, participated and was motivated to do so by its desire to have friends in Latin America during the Cold War (Raffaelli, 1995: 48–

50).

However, the system was far from perfect and its problems became increasingly apparent towards the late 1980s. Gilbert (1996) lists reasons why attempts to control supply were eventually discontinued. Supply restrictions tend to encourage production by non-members as well as non-compliance by members. Excess coffee could be sold to countries that were not members of the agreement. This led to lower coffee prices for non-member consuming countries. Roasters in member consuming countries had to pay a higher price and were unable to freely switch between the type of coffee and the origin they wanted. “Tourist coffee” would travel through non-member countries to member countries to avoid the quota system.

Coffee producers did not always see the benefits of higher coffee prices, which, from their perspective, were reaped by government agencies controlling coffee trade.

There were disagreements among producer countries over how production quotas should be distributed. With new producer countries emerging, it was increasingly complicated to allocate production quotas and to police the implementation of the scheme. The system did not have mechanisms for revising the price range. Changes in costs of production and consumer tastes, for example, could rapidly change demand of certain types of coffee and the level of prices. A downward revision of prices was unpopular among producing countries. As Gilbert concludes (1996:1):

“commodity control fits uneasily in an increasingly globalized and competitive world, and this perception has resulted in a diminished willingness to resolve the practical difficulties of price stabilization.” The Brazilian government was undecided on a new coffee agreement, while the U.S. government was opposed to it. These developments led to the demise of the International Coffee Agreements with their export controls.

Another possibility for price stabilization is maintaining buffer stocks, i.e.

storing coffee during periods of oversupply and low prices. However, oversupply can last for a long time and maintaining stocks involves high capital costs. Although green coffee can be stored for up to a year, quality does deteriorate with time.

Additionally, knowledge of the existence of stocks can depress prices, questioning the logic of maintaining stocks to increase prices in the first place (Gilbert, 1996).

Until the 1980s, many coffee-producing countries had influential organizations of coffee producers, which controlled exports, sometimes bought coffee to stabilize prices, and provided extension services, inputs, and credit. Additionally, many countries had coffee marketing boards, which intervened in markets to stabilize prices and collected state revenue as a type of taxation. However, in many cases,

The Context of Regulating Coffee Production and Trade Globally and in Nicaragua

state involvement in coffee markets was notorious for corruption. In most countries, the organizations of coffee producers lost much of their influence, and the coffee marketing boards were dismantled (Daviron and Ponte, 2005:95, 96).

The end of the International Coffee Agreements as market interventions and the diminished state involvement in coffee markets took place in the wider context of increased trade, decreased barriers to trade, advanced communication technologies, and declining transportation costs, which accelerated the processes of globalization.

As a backdrop to these developments were the end of the Cold War and the emergence of the neoliberal project epitomized by the “Washington Consensus”

among Western governments and multilateral financial institutions. These promoted development strategies based on the deregulation of markets and privatization and liberalization of international trade. This undermined the ability of coffee producing-countries to regulate coffee markets and to collect state revenue from coffee exports (Daviron and Ponte, 2005: 83–126; Goodman, 2008). Free markets led to improved price transmission of international coffee prices to farmers, but exposed them more to price volatility (Krivonos, 2004).

Another explanation that has been offered for the powerless situation of coffee farmers is the oligopsonic market conditions where few actors control trade and roasting (Muradian and Pelupessy, 2005). However, the situation is complex.

During recent decades the coffee value chains have consolidated and fragmented simultaneously. The supply of coffee has increasingly fragmented with new coffee-producing countries entering the market. The largest actors in importing, roasting, and retailing have increased their shares in coffee trade, while new niche markets of specialty coffees have simultaneously emerged (Daviron and Ponte, 2005:90–93).

While consolidation of coffee trade has occurred, liberalization of markets has led to increased competition, reducing the ability of individual actors to exercise market power. In individual countries or regions, monopolistic conditions of coffee buying may occur, but this is increasingly rare due to market liberalization.

Coffee prices behave much like those of many other commodities, with wide price swings during a shortage or oversupply (or expectation of these). Occasionally, seemingly small changes drastically alter the balance of supply and demand. In tree crops, excess capacity can persist for several years after prices fall. This is because once the crop has been established and is producing even when the market price is below the total costs of production, it can be above the variable costs (primarily harvesting, processing, and minimal care of the crops), resulting in supply in the market by producers whose total costs of production are not covered (Daviron and Ponte, 2005:110–113). Low prices will result in low investment and over time this leads to prices that are closer to costs of production. After the collapse of the International Coffee Agreement in 1989, coffee prices fell markedly (Raffaelli, 1995:73). This led to negotiations by producing countries to limit exports. In 1994, the Association of Coffee-Producing Countries was formed with the intention of increasing prices by limiting exports. Coffee prices did rise, but they rose primarily as a result of severe frosts and drought in Brazil in 1994 and a speculative hike in 1997 (Daviron and Ponte, 2005:88, 89). These higher prices in the mid-1990s fuelled a coffee boom in Vietnam, where market liberalization led to policies to

expand agricultural exports, including coffee. This period of slightly higher prices in the mid-1990s postponed the effects of deregulation and liberalization of markets to the early 2000s, when the lowest coffee prices in history were recorded. In 2001, the Association of Coffee-Producing Countries admitted that it was unable to restrict coffee supply (Daviron and Ponte, 2005:89).

In 2002, coffee prices reached their 100-year lows, causing serious problems for coffee farmers and coffee-dependent economies worldwide (ICO, 2003). Since the end of 2004, prices have risen steadily, reaching particularly high levels in 2010 and 2011. In real terms, the highest prices in 14 years were reached in 2011 (ICO, 2011a).

At the same time, productivity has increased through high-yield coffee varieties, higher intensity farming, and some mechanization of production, especially in the largest coffee-producing country, Brazil (Gilbert, 2006).

In this context of reduced state regulation of coffee markets, volatile coffee prices, increased globalization, calls for corporate responsibility and higher quality, and the drastic economic and social consequences of low coffee prices, certification systems and codes of conduct for coffee production have proliferated. Some of the major initiatives include Fair Trade (operated as Max Havelaar certification in the Netherlands since 1988), organically certified, Rainforest Alliance (1996), Utz Certified (1997), and the Common Code for the Coffee Community (2003). As a result of these developments, coffee markets are increasingly differentiated based on various physical qualities and increasingly also on social and environmental responsibility features (Muradian and Pelupessy, 2005). Fair Trade has been considered to stand out among these major certification systems and codes of conduct as one with the highest standards (Raynolds et al., 2007a). Table 1 summarizes major requirements of Fair Trade for certified producers and licensed importers. Fair Trade is also set apart from most other certification systems by having originated from and being supported by a global social movement. In coffee-consuming countries, the Fair Trade system comprises 19 national Fair Trade

Table 1. Fair Trade standards for coffee in a nutshell (summarizing a 22-page document: FLO, 2005)

The Context of Regulating Coffee Production and Trade Globally and in Nicaragua

Marked similarities exist between Fair Trade certification and the International Coffee Agreements prior to the 1990s in their aims to increase coffee prices to benefit producers. Even the nominal price level is similar, which is the result of Fair Trade inheriting the price level at which the International Coffee Agreements aimed to keep prices in the 1980s (Bacon, 2010a).

Some differences exist as well. The International Coffee Agreements aimed to regulate the entire global production and trade or at least the majority of it, whereas Fair Trade exists as a niche market parallel to conventional trade. The International Coffee Agreements attempted to raise prices by limiting production, while Fair Trade sets minimum prices. Fair Trade also sets standards for conditions of production, for example labor standards. Fair Trade can be viewed as a system that sets a higher standard for production and provides financing and incentives to farmers and cooperatives for meeting these standards. Other certification systems have been criticized for lacking such compensation mechanisms that would provide motivation for implementing practices exceeding local norms (Raynolds et al., 2007a; Stigzelius and Mark-Herbert, 2009).

Additionally, Fair Trade provides financing for development through its social premium. Assessing the performance of Fair Trade is complicated by the multiple roles it has taken: Fair Trade is simultaneously a social movement and a certification system, an expression of solidarity providing higher than market prices to poor farmers, a compensation for meeting higher standards in production, a system providing financing for development projects and a development organization financed by official development assistance funds of governments.